Q4 2019 Earnings Call

Ladies and gentleman today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Ladies and gentlemen, thank you for standing by welcome to the Q4 2019 Providence Service Corporation earnings Conference call.

At this time, all participants are in listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.

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I'd now like to hand, the conference over to your Speaker today Mr., Dan Smith, Chief Accounting Officer. Thank you. Please go ahead.

You operator, good morning, everyone and thank you for joining the Providence fourth quarter and full year 2019 conference call and webcast.

With me today from the company, our Dan Greenleaf, President and Chief Executive Officer, and Kevin Dot, our Chief Financial Officer.

During this call members of the management team will be referencing the presentation that can be found on our investor website under the events calendar and in the current form 8-K, which was furnished to the Securities Exchange Commission warning, but.

Before we get started I would like to remind everyone that during the course of today's call. The company's management will make certain statements characterized as forward looking statements under the private Securities Litigation Reform Act those statements involve risks uncertainties and other factors, which may cause actual results or events to differ materially.

Information regarding these factors is contained in today's press release, and then the company's filings with the FCC.

He will also discuss certain non-GAAP financial measures and an effort to provide additional information to investors a definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures is included in our press release Investor presentation, and then our form 8-K.

Finally, we have arranged for a replay of this call which will be available approximately one hour. After today's call on our website, which is www dot P. R. S C holding dot com or via the phone numbers listed in our press release.

This morning, Dan Greenleaf, our Chief Executive Officer will begin with some opening remarks, after which Kevin Dotts, our Chief Financial Officer will provide a more detailed discussion of our financial results. Then we will open the call for questions.

With that I will turn the call over to Dan Greenleaf, President and Chief Executive Officer of Providence, Dan. Thank you Suzanne good morning, everyone and thank you for joining us today for Providence fourth quarter 2019 earnings call I'm very happy to be here for my first earnings call before recapping or fourth quarter finance.

The results I would like to share with you some of the reasons why join Providence and touch on the significant opportunities that I believe can transform and grow this unique entity, namely Providence has a very compelling story. The company provides mission critical services as an essential part of the health care. He goes.

Just on the company is the industry leader with a differentiated and difficult to replicate operating model. The company has a very strong balance sheet and there were significant industry tailwinds propelling the business fourth we are the nation's leading non emergency medical transportation provider.

Through the brand names logisticare in circulation as well as the owner of valuable minority interest in the matrix Medical network. My comments will focus on our non emergency medical business, which stands at the crossroads of health care. We serve is an essential connector in the health care ecosystem.

Bringing together members from providers through our mission critical managed transportation services, our services improve access enhanced quality of life and provide better health outcomes for Medicaid and Medicare advantage eligible members, while reducing cost and variability for payers.

We provide services to our nations most vulnerable patients, including the elderly disabled in children, we take members, including the developmentally disabled to chronic care in behavioral health appointments, including dialysis chemotherapy and substance abuse weird truly the connectors of health.

I also want to recognize and thank all of our teammates for what they do everyday health fellow human beings get access to critical health care to improve their lives will be dedicated and committed team focused on serving our members with respect and compassion with over 25 million calls a year indoor contact centers.

And over 63 million rides each interaction truly matters. So thank you once again.

Our company's mission combined with our value proposition for payers is the reason why im here.

Provenance is benefiting as health care increasingly shifts from higher cost institutional settings to community based care. Our country is laser focused on value based healthcare system that increases clinical outcomes for patients improves.

The quality of their lives.

This positive tailwind along with a rapidly aging population a greater focus on preventative care and expanding Medicare advantage market is driving increased demand for non emergency medical transportation services. This is an extremely sticky business, where we tend to be long term partners with our payers.

We are excited for Medicare advantage in 2020, as a number of Medicare advantage health plans offering transportation benefits have has grown 34% on a year over year basis transportation to medical point Minson pharmacies as one of the fastest growing supplemental benefits within Medicare.

Manage according to mid Pac the total number of Medicare eligible beneficiaries expected to increase from roughly 59 million in 2018 to over 80 million by 2030. Additionally adoption of the chronic care Act opens the door for Medicare advantage plans to offer customized non medical Ben.

Fits the different segments of their populations to improve health outcomes. This puts us into motion the opportunity to significantly grow the Medicare market, which we currently estimate is a 300 million dollar market and do potentially a bit multibillion dollar market probably.

This is the leader he is the leader in this space at approximately two and a half times larger than our nearest competitor and we are the only publicly traded company in this growing industry, our national reach and scale matters, we've developed a difficult to replicate operating model with core competencies and cop Capitated contract models.

In risk assessment as well as expertise managing complex operational workflows, such as eligibility contact center operations network development logistics in claims processing.

The company display several attractive financial cat characteristics that I find compelling including <unk>.

<unk> recurring revenue stream, where approximately 85% of our revenues capitated.

A non cyclical core business with limited reimbursement risk as we are not impacted by CMS Medicare fee schedules and asset in Capex light operating model excellent cash flow generation, a strong balance sheet with over 60 million in net cash no debt and ample credit.

Facility availability, allowing us the flexibility to allocate capital to the best and highest uses an untapped hidden value and our nonconsolidated matrix equity investment.

Well, we commence 2020 with the strong platform for delivering services and growth in our core market I see significant opportunities to transform the way, we do things do create additional value for our stakeholders.

Initial strategic priorities will center on six area areas number one enhancing the voice to the customer number to ensuring that the right people are in the rights seats number three delivering critical technology enhancements to our lcaten circulation platforms number for reducing operational variation driving out ways.

In improving quality or customer service centers number five accelerating profitable growth and then number six rebranding the organization, including a unified message on our mission vision and values.

Regarding my first priority I am intensely focused on the voice of the customer which includes our patients payers as well as our transportation providers I want to ensure we are part prioritizing member satisfaction in a more efficient and effective manner, better reporting and transparency with our payers and investing.

And technology enhancements to make it easy for our members the schedule rides by enhancing our customer centric approach and how we operate we want our members to feel empowered Ginger director healthcare and our payers to have full visibility in input into way, we treat our members Providence will make this a priority.

And I'm personally committed to developing strong relationships with our clients along with the customer first delivery model through our best in class patient care model to make this happen I want to ensure that we have the right people in the rights each which brings me to my second priority I'm committed to putting the best man.

Judgment team in employees on the field to support the company what I believe will be a transformative period over the next couple of years, we've already made substantial progress with the appointments of new leaders within information technology and human resources Walton effort, our new Chief Information Officer brings over 15 years.

Koreans building high performing information technology organizations in the healthcare industry and moral Emery, our new senior Vice President Human resources brings over 15 years of experience and organizational behavior and development I've worked first hand with both of these highly talented individuals and I know they will be strong.

Additions to our team.

I'm priorities three and four I believe there's significant opportunity to leverage technology to improve the membership experience further differentiating ourselves from our competitor, enabling expansion to adjacent markets outside of our core Medicaid market and helping us in reducing operational variation and driving outweighs the company.

One of the most important technology initiatives. We are executing on is the development. The front end member in provider platform. We're blending the best of our various logisticare in circulation technology platforms into a single integrated technology solution, our front end member and provider platform will be.

Driven by Circulations core user interface one of the key features of this interface is the ability for riders to track the rides via mobile App. In addition text messages and voicemail awards will provide rider status updates given approximately 30% of our 25 million annual calls are related to.

REIT status, we're optimistic that features like this will generate significant value for our members improve our productivity. We look forward to talking more about this on future calls.

Also we have several technology initiatives underway aimed at enhancing member experience by reducing the amount of time the contact center representatives spend on the phone gathering information. So they can dedicate more time to helping members.

Outside of technology, we also see opportunities to drive out ways by implementing best practices in a single repeatable model throughout the organization.

My first priority is to accelerate profitable revenue growth our sales and growth teams have spent much of their time focused on reshaping the narrative as we look to change the image of non emergency medical transportation from a mandatory Medicaid benefit into a key solution and addressing social determines and health care.

This is particularly import within the Medicare advantage market, where the services are currently an optional benefits, which from payers can provide historically, we have seen Medicare advantage plans provide non emergency medical transportation benefits to differentiate themselves from other plans. However, these benefits are capped and there.

There are often other restrictions placed on the benefit.

The team has done a great job within this area as we hope to launch several Medicare advantage pilot programs. This year as we start mapping out the potential benefit for our payers, saying on growth. We're excited to announce the recent partnership with common spirit. The second largest nonprofit health system in the us.

And with lift this national partnership will not only help us extend our reach beyond our core Medicaid market, but also allows us to co develop and test or our transportation.

Matt can levy barriers to quality and affordable care.

Finally on rebranding given all the various moving pieces throughout the last couple of years, including the acquisition of circulation and the folding in of the holding company in the Logisticare, We will look to rebrand our organization. This will allow the business to focus on one unified message on mission vision and values.

Now moving onto the financials, we finished the quarter with revenue of 384.8 million, representing a 6.7% year over year growth in adjusted EBIT of 10.2 million for the year revenue was 1.5 billion representing year over year growth of 9%.

And adjusted EBITDA was 51.2 million.

During the quarter, we successfully renegotiated three contracts, which contributed 4 million of in quarter benefit to both revenue and EBITDA as the company as indicated on previous calls certain external forces, including higher utilization insurance rates and minimum wage are resulting in lower profitability cross.

The number of our contracts I really want to call out our contracting and pricing team under Chris Second thing Kevin Dotts. They have negotiated close to 50 million of rate increases across 11 contracts was benefited 2019 heading into 2020. The team remains busy with another 11 contra.

Next that we are actively pursuing.

Staying on revenue or growth team has already inc. $40 million of new business for 2020. It is important to note that the lead time for new businesses can be six plus months. So the work that our team has already put in will help position us well into the future.

From an operational standpoint, as many of you already know there was an organizational change implemented at the beginning of 2019 to prepare the business for transformation.

During this chain certain market level oversight and processes were impacted which resulted in higher transportation costs. Subsequently a decision was made you reverse some of these changes before I joined the company and we're starting to see some encouraging trends within our transportation teams, particularly around network development they're.

Patient team has been busy onboarding, new transportation providers in for the first time all year, we saw net increase in providers at the end of the year. This is important as network capacity and network health are indicators that we look at in each market to gauge your ability to negotiate competitive transportation rates. We're also seeing.

During some positive trends within cost overrides. Most importantly, we saw our transportation costs per trip flatten toward the end of year because of these efforts are predicated on local level operation all execution. It may take a few quarters before we start seeing these early indicators translate into meaningful finance.

Actual results.

We look forward updating investors on future calls as we discuss more of our operating metrics in detail.

We're very excited about 2020 and beyond however, because we are still in the early stages of the turnaround and transformation. The company is not providing guidance at this point in time.

You 20, Twentys year, we focus on improving patient experience in quality through investments in our people processes and technology. Ultimately, we believe the value proposition to company combined with favorable secular tailwinds, we significant drivers of growth and want to make sure we have the REIT structure in.

Place to capitalize on the various opportunities we see with that I will now turn the call over to Kevin Kevin. Thanks, Dan before I get started I wanted to talk about the organizational consolidation for a funnel time.

As a reminder to investors at the time of the announcement, we indicated that we would cut approximately $10 million of cost associated with the former holding company.

In 2019 camera holding holding company cost on an adjusted basis $13 million compared to $20 million in 2018.

For Twentytwenty, we expect these costs to be $10 million, achieving the $10 million of savings that we originally indicated.

Going forward, we will no longer breakout these former holding company cost as the company now operates under one umbrella.

Moving onto the financials.

Revenues increased $24 million or 6.7% in the fourth quarter to $384.8 million.

Most of the year over year increase was related to either increased volume and utilization or rate increases secured during the year adjusted EBITDA was $10.2 million for the quarter.

As Dan mentioned earlier, we successfully renegotiated three contracts during the fourth quarter, which contributed $4 million of in quarter benefit.

For 2020, this benefit will be approximately $8 million annualized.

In addition, we have another 11 contracts, which we are actively repricing.

These rate increases would be incremental to the benefits that we called out on previous calls.

Staying on revenue one of the stats you will notice in the 10-K is the split between state and managed care or MCR revenue.

During 2019, we saw I flip were MC goes are now a larger portion of our business going from 47% of revenue in 2018% to 51% in 2019.

Several reasons for this change, including the trend of states pushing Medicaid lives to Mcf goes.

Different trip type eligibility rules Sep I am Ceos.

And other trip related dynamics, including more defined definitions of in network facilities.

We are seeing longer trips within our mcl contracts, particularly as MC goes have a list of preferred facilities or providers.

As our MTO business grew over the last couple of years Capitated reconciliation and fee for service contracts have increased to approximately 30% of our revenues with a capitated recon contract.

We are still paid a PMPM or per member per month that our payment as trued up in six month intervals based on various factors, including utilization and transportation rates.

Or fee for service contracts, we typically build payers after we pay the transportation claims, resulting in a natural collection slack.

As such the mix shifting towards more mcl business, we have seen accounts receivable rise over the last couple of years that said the trade off of slower payment terms is PNM protection as we have an automatic feature to recoup higher transportation costs.

Moving below revenue, our gross margin percentage defined as revenue less purchase services was 21.1% for the year compared to 23.8% in 2018.

The 270 basis point reduction was attributable both to several factors, including higher cost per mile and utilization. In addition to process isn't impacted by the previously discussed centralization efforts.

We continue to address some of the margin compression through contract renegotiations.

From an operational standpoint, as Dan mentioned, we started to see some encouraging trends within transportation costs towards the end of the year and look forward to discussing some of these metrics in more detail on future calls.

Our adjusted operating expense defined as all other operating expenses, excluding purchase services and after adjusting for add backs was 17.7% of revenue in 2019 versus 18.6% seeping at 17.7 presenter revenue in 2019 versus 18.6% in 2018.

90 basis point reduction was attributable to cost savings generated as part of the organization consolidation.

And Twentytwenty, we may give back a portion of these savings as we look to make investments and our team our processes and our technology to the extent possible, we land to call out any onetime figures during 2020.

Moving to our cash flow statement operating cash flow for the year was $60.9 million, which includes $31 million of tax refunds and $6.6 million of tax avoidance generated from the sale of WD services.

Matrix equity investment moving onto our investment in matrix for the fourth quarter 2019 provenance recorded a loss in equity earnings of $23.5 million related to our matrix equity investment. The loss was primarily as a result of matrix incurring a pre tax goodwill and intangible asset impairment charge a fee.

$35.1 million related to its acquisition of healthcare.

In the fourth quarter of 2019.

Matrix generated revenue of $64.6 million and adjusted EBITDA of $6.3 million for the year revenue was $275.4 million and adjusted EBITDA was $44 million.

Despite facing volume churn early in 2019 matrix delivered volume growth driven by increased membership in yield adjusted EBITDA was primarily impacted by the mobile.

Mobile's underperformance, along with higher indirect and direct cost.

For fiscal year, 2020 matrix management expects volume growth by.

Driven by higher membership increased yield and new logos.

Matrix continues to mitigate industry wide compression price compression from renewals by providing add on services operational efficiencies and productivity initiatives to maintain its margin profile.

A quick note to our investors before turning the call over for Q1 day, we expect to file our 10-K, either aftermarket today or early tomorrow morning, as we await the final audited financials for matrix.

This concludes our prepared remarks with that operator, please open the call for questions.

Thank you as a reminder is to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith.

Please standby well, we compile the culinary roster.

Our first question comes from Bob Labick CJS Securities. Your line is now open.

Good morning, Thanks, a lot of good information there.

Thanks, Bob. Thanks, So just first congrats on the successful renegotiations, obviously, the 4 million contributions nice in the quarter very good and it's the continuation of what you were shown in Q3.

Last year, so it's great.

Can you tell us how much it sounds like maybe maybe half or so but how much of that was retroactive and then perspective, and then talk about the potential for additional renegotiations just without.

Numbers, that's fine, but order of magnitude of the opportunity ahead of you.

So Bob again, yes, we got $4 million I think all of that was let's say within the quarter. So wouldn't have gone back to the prior prior part of the here. So that was 4 million and so then we pick up the benefit for the next 12 months that makes it eight.

We're working on an additional 11 contracts right now and.

So thats kind of in play.

It's hard to determine exactly where those pricing elements will be.

But obviously as we close those during the year than we would obviously report out on what that impact is within each of the quarters.

Got it Okay and then.

I think you touched on this in the prepared remarks, but maybe we can go a little deeper obviously, there's been big industry.

Headwinds to the transportation costs and you think said that you are due to the successfully getting more transportation providers or network is actually growing again, which is fantastic. Obviously gives you some leverage going forward.

Talk a little bit about transportation costs.

In more depth as they trended.

We ended the year and where they can go again order of magnitude percent Theres a couple of your.

Cost or 76% than they were 80%.

What are the up what's the opportunity to capture some margin coming back.

So I think we feel pretty confident that were trending very well. The one point that I would look at as you know there was some noise in the third quarter as it relates to repricing of large contracts and so if I normalize that inherently.

Repricing of some very large contracts back in the third quarter and I compare that to the performance in the fourth quarter, what I'm looking at sequentially is there is a basic what is hitting the bottom line was about a 400 basis points improvement.

A lot of that driven through the idea that transportation cost is being managed and as Dan had noted in his his area that the we're seeing that cost per mile on unit costs kind of flattening at this point. So you know we anticipate that will make continued oh opportunity, we'll continue to make.

Progress, giving on that in 420, 20, and we should see increased gross margin as a percentage increase should be up.

I'd say.

You know probably.

A couple hundred basis points at best.

Okay I'd be fantastic Vicki you have to get that back would be great and then I think we've talked in the past.

Two on the opportunity at the call centers, obviously transportation cost as the biggest component of service costs, but call centers is still an opportunity. There you talked about the integration of circulation at the front end of logistic CAD and the opportunity to reduce.

Volumes of calls in times of calls is there anyway to quantify the potential cost savings over time at the call centers from.

Enhancing the technology, and IDR and things like that.

I think there I think it's very very significant our AR VR utilization is somewhere in the 2% to 3% range right now and our experience has been that you know.

Companies are somewhere in the 15% to 30% range I think best in class is 30%. So that's just kind of gives you an order magnitude in terms of the number of calls were answering that we think actually could be automated.

And we've always already talked about the potential around.

Where's My ride so if you start adding up what the IB our system might be able to do and what what the whereas my ride app will be able to afford in terms of of.

What the patient will be able to see I mean, you can kind of do the math pretty quickly in terms of volume.

I think theoretically you could see a 50% reduction call volume at the call centers. If you just think about between an Ivy our system in an app that allows patients to see where they are right is because those are again.

Through the more predominant reasons why people call into the call Center is setting up the right and then secondly is asking where am I right is.

Got it okay that's great.

And then on matrix I think he said if I just want to verify how's the corematrix doing and if we're most of the losses from just bigger losses that you know how fair slashed mobile and is there an opportunity to.

Turning that around in 2020 or is that something that has to be shot or.

What can what can happen with the mobile fresh welfare.

I would characterize this way I think you're exactly right I think we saw the home health services side of business continue to grow through the year, we're seeing.

Additional services being offered at higher price points. So I think you know with the expectations are for 2020 at the home Health services will continue to demonstrate good growth improved.

Average sales price.

That will offset I think what is it again the drag that they're seeing from the.

On the mobile business at this point.

Got it Okay last one from me I promised.

Obviously, a pristine balance sheet at the end of year 60 million plus and cash no debt.

You talked about the capital allocation priorities and what that might be used for.

That's a great question, Bob I think number one is that from my perspective, we have to continue to enhance our our technology platform and.

We're very fortunate to be in a position, where we can make those kind of investments and and so I you know so thats one of them as just making sure that we deliver on the circulation slack and flash al CAD product.

Number two is really.

It's technology related is.

Automating.

Think we've the company's done.

I think a less than ideal job in terms of the things they could have automated over the course of the last several years and and we think theres a significant opportunity to enhance the the patient experience to enhance the customer experience and obviously too.

To lower lower cost overall, so I think thats something else that we are very intensely focused on.

So Kevin you want to saving more no I think that's I think that's right I think there's.

Going to be.

A significant.

Improvement just operationally and as you talk about driving up variation right.

Okay Super Thank you very much alright, Thank you Bob Thanks, Bob.

Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to Dan Greenlee for any closing remarks.

No I don't have anything else I, just want to thank everybody for participating on the call today and.

I look forward to.

Providing you an update in after the first quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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